The Future of Exchanging Value Uncovering New Ways of Spending

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The future of exchanging value Uncovering new ways of spending Our relationship with merchants has moved away from the cash register and we now stand at the edge of a dramatic shift in where, when and how we exchange value. Organisations that cannot work with regulators to engender trust in their solution’s operation or follow the consumer-merchant relationship and provide payment solutions that are not instantaneous and ubiquitous, risk being left behind

b Dynamics of the Australian Superannuation System The next 20 years: 2011 – 2030 Contents

Exchanging value 1

When we exchange value 4

– Why do some payment solutions succeed, while others fail? 6

Where we exchange value 7

How we exchange value 10

– Thriving in a challenging retail landscape 14

The future of exchanging value 15

– The future of payments providers 16

– Regulation in a more complex environment 18

References 19

About the authors 20

Dynamics of the Australian Superannuation System The next 20 years: 2011 – 2030 1 The future of exchanging value

Exchanging Value Consumer behaviour is changing. Where, when and how people purchase the goods they need is evolving, as new technologies and business models remove the need for conventional commercial interactions between customers and merchants. Consumers are making their purchases when and where they discover their need, rather than engaging in a traditional shopping mission to seek out the goods, and often bypassing conventional payments solutions in the process. This might be as simple as clicking the Buy Now button at the end of an online book review, instead of noting the title with the intention of seeking the book later. It could involve using points from one company’s loyalty program to rent a movie from a second company, with the movie streamed direct to the consumer’s television. Or it may be more complex, moving the transaction from the physical world into a virtual social network shared by vendor and customer. Consumers are choosing to transact when, where and how it is most convenient to them.

Payments are moving away from the cash register and the PoS terminal. New payment models and systems are emerging that have the potential to disrupt current payment technologies and organisations. Using a range of low-cost, off-the-shelf services and technologies, retailers and consumers are knitting together ‘good enough’ solutions that are more convenient and efficient than established payment offerings.

1 The future of exchanging value Emerging payment solutions promise to provide simpler and more efficient means of exchanging value by Early in the day, you arrive at the train allowing transactions to be conducted in the context station and join the queue at the coffee and currency that is most convenient. The ability to tie transactions to a social context shared by consumers cart. Realising that you’re in the queue, and retailers also has the potential to improve customer the vendor pings you via your smart phone loyalty and retention. Potential losers in this transition may be the existing payment providers, finance institutions and asks if you would like your regular and telecommunications organisations, as lower-cost alternatives allow customers and retailers to bypass order. By the time you reach the front of established payments infrastructure. the queue your order is ready. You simply While the potential for disruption is high, the role of pick up your coffee, tap your phone against sovereign currencies and established payment solutions is secure in the short to mid term; any shift in consumer the vendor’s terminal, and you’re on your behaviour will be gradual due to the need for consumers to develop a level of trust in these alternative payment way to work methods. However, growing adoption of alternative platforms and currencies is driving us to take a more Imagine a scene as trivial as buying your morning coffee. nuanced view of payments. What is interesting about this scenario is that it can be imagined without conventional payment infrastructure, Organisations need to look beyond traditional, narrowly established or planned. Location awareness might come defined payment platforms and consider their customers’ from Google Latitude1 or foursquare2. The payment broader job they want done. What is needed is a can be affected via a smartphone- or tablet-based customer-centric approach centred on simplifying the mobile payment solution from PayPal or Square3, customer’s purchase by ensuring that the right payment while the transaction itself might be denominated in a solutions is available at the right place and time. Payment complementary currency, such as Facebook Credits4, solutions need to be perceived as instantaneous by their Bitcoin5, or points accrued via a customer users, allowing consumers to exchange value and then loyalty program. move on with their day, whether they are interacting with an established merchant to simply standing on the kerb The two sides of any payment are clearance and splitting a bill with friends after an evening meal. The settlement. During clearance the participants in the solutions need to be ubiquitous, allowing customer and transaction exchange details, which are examined and merchant to transact at the far end of the store or deep compared to ensure that the orders to buy and sell in the aisles just as easily as if they’re both standing next are allowed to proceed. Next, in settlement, the debt to the till. And finally, these solutions need to be open, is extinguished through the exchange of something both in their implementation and governance, so that of value. consumers can understand and develop trust in these Start-ups are creating new, novel clearance solutions, new ways of exchanging value. allowing merchants and their customers to identify The introduction of these new payment solutions will each other based on their respective memberships in change not just how we capture and manage payments, online services and social media platforms, and use but rather it will also influence how we account for and this identification as the basis to approve a transaction. audit payments, and how we manage the risk associated Other organisations are offering new settlement with the increased use of complimentary currencies, mechanisms, allowing a transaction to be completed by such as points from loyalty programs and the credits transferring funds in a complementary currency. associated with gift cards and emerging social media Individually these new clearance and settlement solutions payment mechanisms. In the background is the risk, work with conventional payments systems and regulation. for all stakeholders, of new regulatory regimes driven by Together they have the potential to provide us with new governments’ need to provide a safe environment for mechanisms to effect payments that are currently outside consumers and to protect tax revenues. the frameworks managed by the central banks, such as the Reserve Bank of Australia.

The future of exchanging value 2 Price comparisons would be between first and second, or fourth and fifth. What we’re seeing now is a consumer who shops either on price, or on quality – the number one premium, or the retail price point. All the middle brands have gone

Sue Morphet, CEO PacBrands6

3 The future of exchanging value When we exchange value The balance of power in commercial relationships has shifted from businesses to consumers. The growth of the Internet and the businesses that ply their trade on this channel provide consumers with the unprecedented ability to compare products and suppliers from anywhere around the globe, and to source the products they want from whichever business will give them the best deal.

This has flattened the playing field, changing the nature of how consumers make decisions. Prior to online retailing there would often be five or six similar products on the supermarket shelf, starting with the most expensive premium brands and working down to the house brands. Consumer choice was restricted An increasing number of visitors to Australian shopping to the options available locally, a choice based on the centres are only interested in browsing before making information presented to consumers by the retailer. their purchases elsewhere. Macquarie Equities Research Consumers can now reach around the globe and access found that eighteen per cent of visitors to shopping information on how and where to secure the best centres prefer to window shop at centres before making possible product and deal to suit their needs. Now they the final purchase on the Internet. For a growing are sourcing the lowest price, or the highest quality (at minority of consumers shopping centres are becoming the best price), from a global market. entertainment rather than shopping destinations. Discount Internet-only retailers are using lightweight, The boundaries between the online and offline worlds is low-cost business models to deliver products direct to blurring as companies blend the two retail experiences. consumers at price points dramatically below those Apple, for example, opened its own chain of retail stores, of their traditional bricks-and-mortar competitors. providing a physical presence that enables customers While traditional retailers are closing stores as they see to play with their products, becoming familiar with sales contract, many online and direct-to-consumer them before buying them through the channel that is businesses, are seeing double-digit growth7. most convenient.

The future of exchanging value 4 The blending of offline and online payments is changing the way consumers transact. The shopping mission, A teenager has been the search through high street retailers for the products admiring her friend’s we need, is in decline as consumers move from being search-driven to being opportunity-driven. Rather sports shoes, investigating than undertaking a mission to procure a product or different styles while they service, or to solve a defined need, consumers are buying impulsively once they realise that they have the were window-shopping opportunity to fulfil a need which they may (or may not) have previously thought that they had, using the payment during their last trip to the mechanisms available where they are at the time.

shopping centre. At her Retailers need to take a more nuanced view of how and friend’s house one night, when they transact with their customers, treating face- to-face or online interactions as just one element of their she tries on her friend’s shoes engagement with the customer. to see how comfortable An approach that integrates face-to-face and online service allows a retailer to engage their customers over they are, and decides to more of the buying cycle and build a deeper connection buy some then and there. than through either medium alone. Providing customers with the ability to transact more efficiently simplifies Going online she quickly the buying process and allows customers to make more finds a retailer that has the impulsive decisions. Combining the two enables the retailer to draw closer to their customers, simplifying style she wants in her size, and streamlining interactions and making it easier to do business together, while also creating a shared investment and at the lowest price. that can improve customer loyalty and retention when She places an order, with the managed wisely. sports shoes being shipped directly to her home

5 The future of exchanging value Why do some payment solutions succeed, However these markets’ established banking while others fail? networks meant that M-Pesa’s mobile wallet There has been a trend in recent times for a didn’t provide a large enough benefit to most successful payment solution, one that is well individuals for them to adopt it. established in its home market, to fail when it Technology is the focus of most modern is moved to a new market. M-Pesa is a case in payment solutions, as historically it has been point. While a solution might have a compelling the challenge of acquiring technology that has value proposition in its home market, its value determined what solutions we can provide. may be much weaker in the different cultural M-Pesa, for example, is defined by its mobile landscape found elsewhere. wallet, the application that sits behind the mobile Historically, payment solutions have been phone network. More recent mobile payment adopted when they provided individuals and solutions are being built around NFC (near field businesses with simpler and more convenient communications), as NFC promises to transform means of exchanging value than what came the swipe-and-sign or chip-and-pin transaction to before. Promissory notes were easier to exchange a simple wave of the customer’s mobile phone. than coins. Banknotes formalised this process, But is this a problem that the customer really reducing the risk of fraud. Cheques enabled needs to be solved? the individual issuing the financial instrument Consider the typical NFC transaction. A customer to set its value. Credit cards avoided the need is standing at a till waiting for the clerk to tally to manage cheque accounts, allowing people up their purchases. They’ve probably spent some to focus on what they had done rather than time already in queue waiting, and possibly even planning what they wanted to do. And modern a longer period of time wandering around the mobile payments solutions allow us to break the store finding the products they want. While NFC physical tether and effect payments anywhere. might save them a few seconds at the till, the There were two factors common to each of customer would probably prefer to use their these successful solutions: they solved a problem, smartphone to scan an item’s barcode when removing friction from the process of exchanging they picked it up, and make the purchase on the value; and they were easy to adopt, building on spot. While the problem solved by NFC is real, the tools already in use. Promissory notes were, the benefits it brings are minor in the overall initially, simply written on scraps of paper. scheme of things. Cheques books were distributed to account Payment solutions often fail when they take holders, and the completed cheque returned to a solution-centric approach and neglect to the issuing bank. Credit cards were distributed to understand the customer’s problem and account holders, while the paperwork required the context in which the problem must be to accept them sent to merchants. BPay used the solved. The wealth of technologies available emerging Internet to streamline the process of today removes much of our need to acquire a paying bills. technology to support the payment process, If a solution fails to address both of these factors and allow us to focus on how to use technologies then it can struggle to succeed. With M-Pesa, (both our customers’ and our own) to streamline the new markets had the required infrastructure the process of exchanging value. Where we (in terms of mobile phone penetration). Where we exchange value

The future of exchanging value 6 Where we exchange value solutions that often circumvent existing payment Historic payment solutions, for their many virtues, are also infrastructure and financial institutions. Hong Kong, inconvenient. Cash and cheque are effective, but they in one instance, adopted a stored value solution for mass are rarely efficient. The need to obtain currency and then transit in 1997, a contactless payment technology called count out the change, or the problems of reconciling Octopus. Acceptance of this technology is staggering; the chequebook at the end of the month, are tasks that the number of Octopus cards in Hong Kong outstrips many consumers and businesses would rather avoid. the local population. The convenience of the Octopus Since the mid-20th century many pundits have heralded card is catching on with merchants and commuters, the impending cashless society as credit cards and direct and the cards are being used at other micro payment bank transfers replace cash. It may be that the emergence venues, such as fast food restaurants and parking of mobile payments is heralds the final tipping point as facilities. A consortium of transport operators offers the 10 we move to that outcome8. service without any direct involvement from financial institutions; consumers are free to top-up their cards via There has been a long running trend to simplify our cash or credit at a range of participating retailers and transaction environment. The most recent domestic transport operators. landmark is in 1997 when BPay was introduced, providing a way of routing payments between merchants M-Pesa is seen as the most successful of the recent and banks without the need to exchange cheques – mobile payments solutions. Created by Safaricom, a world first. M-Pesa is a branchless banking service to support microfinance activities in Africa. The system provides A new generation of payment solutions is emerging the unbanked with cheap and easy access to basic which avoid the engineering-driven approach used by banking functions via an e-wallet accessed via their these major industry initiatives, creating simpler payment mobile phone, enabling person-to-person transfers, solutions which are more tightly integrated with the tools transfers between businesses and individuals, cash and techniques that consumers use to manage their daily withdrawals (at designated locations), and loan receipt lives. These are small but potent point solutions tailored or repayments. M-Pesa delivers a simple, but valuable, to specific demographics, rather than large generic service using available resources that are understood solutions intended to be adopted by all and sundry. and accepted in its target market, enabling the service PayPal, for example, burst on the scene in 1998 by to achieve 56% growth in 2011, with M-Pesa’s almost providing an email-based web service to facilitate money 14 million of users representing 81% of Safaricom’s transfers. This service grew from its niche to become a customer base in Kenya11. However, while extremely general web-based payment platform. successful, the narrowly focused M-Pesa solution has Consumers have shown that they will adopt these new struggled outside of its original market, based as it is on payment solutions when the solutions provide a simpler, fulfilling local needs with a local solution. easier and cheaper alternative. For example, mobile The tipping point for broader acceptance of mobile carriers used the bill-to-pay revenue model, a highly payments might well be the current mass adoption of disruptive payment strategy, during the recent Haiti smartphones, with Apple’s iPhone and the smartphones disaster to raise donations. Text message donations based on Google’s Android platform leading the charge. for Haitian earthquake relief raised US$25 million from A plethora of payments solutions is developing around 2.5 million mobile users in the United States, bypassing these devices, leveraging their cheap computing power financial institutions existing clearance systems altogether. and ubiquitous network access to create solutions that (Though it must be noted that mobile users who donated are cheaper and more flexible than those offered via would have settled their monthly phone bill through existing payments infrastructure. conventional financial channels.)

Empirical evidence is already available that cash is in serious, if not terminal decline9 as consumers and retailers adopt a new generation of payment solutions,

7 The future of exchanging value Square, for example, founded by some of the same PayPal launched Paypal Instore in May 2012 in both people as Twitter, provides a credit card-based payment the US and UK providing consumers the ability to use solution that uses a small, square, magnetic stripe reader Paypal when shopping instore14. The solution is a mobile to transform any smartphone or table computer into a application targeted at common, consumer grade merchant payment terminal. Using a simple fee structure, commodity mobile platforms and does not require credit one based on a percentage of the transaction and with cards or NFC. Paypal was able to acquire rapid reach of no upfront investment from the merchant, Square is up to 40 million payment terminals through alliances with quickly gaining a foothold in the bottom-end of the major terminal providers including Verifone, Equinox and payment market with its annualised rate of payments Ingenico. The company predicts that in the next five years processed estimated to be $5bn in April 201212. Its new that a majority of the $5.5 trillion in retail transactions product Square POS is also helping it march upstream that occur in bricks-and-mortar storefronts (what PayPal with small businesses. terms proximate transactions) will be handled by mobile devices15. General purpose solutions are already starting to emerge such as with Emue*, an authentication solution designed The latest version of Square’s payment solution to protect consumers from fraud during web and does away with the physical card altogether, telephone based banking and merchant transactions. allowing customers simply tell merchants to place a With Emue, you control the authentication process by payment on their tab, with the merchant authenticating entering your PIN into the Emue iPhone application. the transaction by comparing the customer in front of Your PIN is not stored on your phone, however, it is used them with a photo of the account holder presented to generate a unique series of numbers that can verify the by the Square’s till application on their smartphone remote service you are dealing with or authenticate an or tablet16. online purchase. At the same time we’re seeing the consumer side Google’s recently announced Google Wallet, an Android of the equation being addressed by start-ups such application, is the next step in the development of a new as Movenbank and Bank Simple, which are creating generation of payment solutions. Google Wallet converts consumer-driven, mobile-focused banks (underwritten your Android mobile phone into a credit card, allowing by more conventional banking organisations) that do you to make payments to merchants and transfer funds without conventional banking infrastructure. to other individuals via contactless payments enabled by near field communications (NFC), for suitably equipped smartphones. Consumers simply wave their smartphone near a merchant’s terminal to effect a transfer.

PayPal, which is also offering an e-wallet application, is seeing 25% month-on-month growth of mobile payments13 and has just introduced a new mobile payment solution that includes innovative features, such as allowing users to decide how a payment will be completed after the purchase has been completed.

* Emue is 50% owned by Deloitte Australia.

The future of exchanging value 8 Retail organisations are already exploiting the capabilities provided by the latest generation of smartphones to A consumer is wandering engage consumers outside of traditional bricks-and- through a shopping centre, mortar and Internet-based stores. Tesco’s Korean subsidiary, Home plus, opened a number of virtual whiling away a hot afternoon subway stores in Korea17, allowing consumers to in air-conditioned comfort purchase a range of items, including food, electronics, office supplies and toiletries, while waiting during their by trying on a few clothes daily commute. Pillars and platform screen doors were covered with images of life-size store shelves filled and catching up with friends. with goods – such as milk, apples, a bag of rice or Finding something they school backpacks – which each carry a small barcode. Shoppers would download a related application onto like, they scan the barcode their smartphone and make purchases by taking photos with the camera on their of the barcodes. This is an idea that has been adopted by a number of retailers domestically, creating virtual smartphone. An app searches vending machines as part of their shop fronts, displaying products that can be purchased by scanning a product on-line and off-line retailers QR code into a third-party QR application.

to find where else the same The current technology environment provides a wealth of garment can be found, options for interacting and transacting with customers. The challenge has moved from technology invention, providing the consumer solutions built on capital intensive initiatives requiring with a list of options broad industry cooperation, to the problem of crafting a solution that weaves together the services and ranked by colour and cost. technologies required to provide the most efficient and satisfying end-user experience, as shown by M-Pesa, The consumer can choose Square et al. No longer does the simple availability of a the garment they prefer technology with broad industry support imply that the and either walk around the technology will be adopted. The shift to a customer- and outcome-driven payment corner to another off-line system based on cheap, good-enough consumer retailer offering a cheaper technologies has the potential to disrupt past and current investments in point-of-sale (POS) and near-field price, or simply have the communication (NFC) networks. Consumers and retailers are flocking to good-enough solutions that enable them garment sent directly to their to transact more efficiently, and in today’s consumer- home from an on-line retailer driven society successful solutions will be the ones that provide consumers with the ability to transact where and when they want.

Payment providers need to adopt a more design-centred approach, building their payment strategy around how consumers’ jobs to be done are changing. Their strategies must provide integrated payment solutions which simplify interactions between consumer and retailer as their shared conversation moves between online and offline environments, and between physical and virtual locations, and between different physical locations.

9 The future of exchanging value Consumers are increasingly accessing internet services, and shopping online, with their mobile devices from the comfort of their lounge, or even from the aisle of a bricks- and-mortar store

Growth of the mobility (smartphone) market Growth of penetration of wireless access as a percentage of all internet usage

100%

80%

60%

40%

20%

0% June 2006 Sep 2006 Mar 2007 Dec 2007 June 2008 Dec 2008 June 2009 Dec 2009 June 2010 Dec 2010 Jun 2011 Dial-up DSL Mobile and Fixed Wireless Cable, ﬁbre, Satellite and Other

Source: http://www.abs.gov.au/ausstats/[email protected]/mf/8153.0/

How we exchange value The Internet provides us with the ability to connect with We’re witnessing a return to complementary currencies; other people in ways that were not possible before. currencies not backed by a national government and While email might have been the Internet’s original killer not necessarily legal tender. This started with Bartercard application, allowing us to communicate cheaply and and consumer reward programs in the eighties, before easily with individuals next door or on the other side of morphing into modern loyalty equity programs (airline the world, it was the development of online games that frequent flyer programs, etc.). The recent emergence of first drove people to find alternative ways of exchanging virtual communities spread over the Internet has triggered value through online ‘currencies’. These currencies are the development of a new generation of complementary used to buy and sell virtual goods within games and, currencies as these online communities’ members find in some instances, goods in the real world as well. ways to exchange value among each other.

The future of exchanging value 10 While virtual currencies have existed for some time, Bitcoin has been designed as a virtual peer-to-peer it was the success of World of Warcraft and its associated currency to support low-cost payments without requiring secondary markets that, in 2004, brought virtual centralised payment processers. A number of well-known currencies into mainstream attention. Practices such as organisations, the most prominent being Wikileaks and gold farming (playing an online game to acquire virtual LulzSec, have adopted Bitcoin. The currency’s ability to currency which is then sold to other players for sovereign support anonymous transactions (much like physical currency) have emerged, along with secondary markets currency) has also seen it used in anonymous online for these virtual currencies, often against the express marketplaces. Rather than fixing the value of the virtual wishes (and the terms of service) of the organisations currency in terms of established sovereign currencies, supporting the games. Real money commerce in Bitcoin fixes the total quantity of currency instead, and virtual markets has grown to become a multi-billion- lets its dollar value float. Bitcoin has, in effect, created its dollar industry. own private gold standard where the money supply is fixed rather than subject to increase via the printing press, The emergence of social networks in the past decade bringing with it all the associated problems of money has continued to blur the boundaries between the virtual hoarding, deflation and depression historically associated world and the real world, and virtual economies and real with fixed currencies20. economies. Hub Culture18 is a social network service that operates its own virtual currency, the Ven, intentionally The most notable virtual currency to emerge recently blurs the distinction between the real and virtual worlds. is Facebook Credits. Intended to be used by Facebook Members create profiles with tags tied to areas of members to purchase items in games and non-gaming expertise and knowledge, and then share information to applications on the Facebook platform, the virtual help others in the network with business-related activities. currency’s use has already expanded to include other goods and services with companies such as the BBC, Hub Culture created the Ven in 2009 to allow members which allows Facebook members to rent episodes of to charge others for access to individual articles or recent television shows and accept Facebook Credits videos posted inside the network, with the value of Ven as payment21. Facebook sets the exchange rate for determined on the financial markets from a basket of Facebook Credits, and takes thirty per cent of all credits currencies, commodities and carbon futures. The Ven is ($0.03 in every $0.10) redeemed by merchants. actively traded against other major currencies at floating exchange rates. In April 2011, Hub Culture announced Companies are beginning to provide integrated the first commodity trade priced in Ven for gold contracts access to this plethora of currencies (virtual and real). between Europe and South America19. Fidor AG, an innovative community bank in Germany, has introduced a multi-currency, prepaid e-wallet: The practical distinction between complementary or Fidorpay. Fidorpay can be used via web or mobile virtual and real currencies is being rapidly eroded as apps, and includes the ability to purchase and manage consumers become more comfortable with exchanging precious metals and virtual currencies, such as Facebook credits or points rather than dollars and cents. What Credits, in addition to sovereign currencies. Once a started with frequent flyer points and store rewards user has stored currency into their account they can programs has evolved to the point that a global virtual send money to other Fidorpay users. The system works currency has been developed: Bitcoin. nearly in real-time, with money credited to the receiver’s account in a very short timeframe. Sending and receiving money is fee free, and users can also lend currency via Fidorpay to friends. Users also do not need to have a commercial relationship with Fidor to obtain and use a Fidorpay e-wallet.

11 The future of exchanging value A teenager wants to buy the latest episode of their favourite videogame online, but finds themselves unable to obtain a credit or debit card. Heading to their local newsagent they use cash to purchase a gift card from a major retail chain. When they return home they use the credit stored on the gift card as a complementary currency to purchase their game via the Internet store of a second retailer, one related to the company providing the gift card only by their willingness to accept the gift card in lieu of sovereign currency22

The future of exchanging value 12 Consumers are leaving behind traditional forms of payments, such as cheques, as the move to more flexible and convenient debit and credit cards

How we exchange value

No Financial year Debit cards No

100 100

80 80 Credit credits

60 60 Direct credits

40 40 Direct debits

20 Bpay 20

Cheques 0 0

1996 1999 2002 2005 2008 2011

* Apart from BPAY, data from 2002 onwards are based on RBA’s Retail Payments Statistics. Data for earlier years come from APCA and the RBA, and have been adjusted for differences between these sources and the Retail Payment Statistics Sources: ABS; APCA; BPAY; RBA

Debit cards Credit cards Direct credits Direct debits Bpay Cheques

Consumers are using a range of currencies to procure A transaction denominated by points on a retailer’s gift the goods and services they want and need. From the card, or by credits issued by a social media platform, sovereign currencies we’re all familiar with through is subject to changes in the terms and conditions set frequent flyer programs, loyalty programs, and gift by the organisation underwriting the complementary cards, through to virtual currencies, such as Bitcoin and currency used, as well as to the organisation’s Facebook Credits, consumers are increasingly using the financial health. currency that’s most convenient wherever they are. Accepting complementary currencies may be a fact of The increased use of complementary currencies life in the future, as our customers increasingly choose to exchange value raises the possibility that many to transact in private spaces, such as social media transactions will completely circumvent conventional platforms. The additional risk this implies needs to be financial institutions. Removing traditional financial balanced with currency hedging and audit strategies institutions from a transaction increases the risk for that enable us to harvest the opportunities we find via all parties. these new currencies, without making our own solvency dependant on the whims or financial health of a third- party organisation.

13 The future of exchanging value Thriving in a challenging retail landscape Or we might consider moving the transaction into The shifting sands of the retail landscape, one of the virtual spaces and use social media and the changing nature of how we exchange services as a platform to exchange value. value, are both an opportunity and a challenge. Value can also be denoted in more than a We now know more about our customers than sovereign currency. We might be required to ever, allowing us to follow their preferences accept a complementary currency mandated by and build a closer relationship. At the same the owner of the social network we are sharing time, the effect this is having on our business (such as Facebook Credits). Or we might choose processes, changing the way we do business, is a to accept gift cards, or other non-traditional challenge we must actively manage. payment mechanisms, offered by other Social media has moved beyond being a mere organisations as a way of simplifying the buying fad and now appears to be an enduring part of process for our customers who cannot (yet) the commercial landscape. While the name of the obtain credit. individual technologies and companies will likely Adopting these new platforms and technologies change over time (just as MySpace was overtaken requires us to change our business practices, by Facebook), the idea of using lightweight bring with them new risks that we need to tools to form a stronger social bond with our manage. Accepting a significant portion of our customers is here to stay. payments in a currency provided by a corporation Our interactions with our customers are moving (such as Facebook Credits or frequent flyer online and into one or more of these virtual miles) exposes us to the whims of the market social contexts. Social media provide new ways (as when Ansett collapsed, taking many to connect with customers, touching them customers’ frequent flyer points with it), as well over more of the buying cycle. Businesses are as to the whims of the company providing building Facebook pages that customers like, the complementary currency (as with PayPal’s and responding to their tweets as they confront tendency to withhold funds without recourse due 23 and solve the problems in front of them. to a perceived infraction ).

It is only natural that when and where we Merchants must develop new business processes transact will follow our relationships into the and risk models to support the practicalities of virtual world. Bringing payments into this new accepting and managing these new payment social context will simplify the buying process, platforms and currencies. They also need to bringing the convenience of one-click buying look beyond the transactions and consider from Internet and, via smartphones, into the the mechanics of how these accounts will physical world. If we want to take advantage of be audited, and address the risks (and the this opportunity, then we need to adopt a more mitigation and hedging strategies that come with nuanced view of how we exchange value with them) associated with relying on non-banking our customers. We need to think beyond the till institutions to manage an increasing proportion and experiment with ideas such as aisle buying, of revenues. where an individual uses their own smartphone to buy an item in the aisle when they pick it up, simply showing the receipt on their phone as they leave the store, rather than forcing them to take their selection to a till.

The future of exchanging value 14 Conclusion

The future of exchanging value As payments blend with virtual communities (and the While the potential for new technologies and currencies new contexts and currencies this implies), and the to disrupt the existing payments ecosystem is high, distinction between real and virtual spaces is eroded, the role of sovereign currencies and established payment it is important to ensure that a payments strategy aligns solutions is secure in the short to medium term. Any shift with how people interact and transact in these new in consumer behaviour will be gradual due to the environments, and how they bridge between the old need for consumers to develop a level of trust in these and new worlds. A longitudinal approach is required, alternative payment methods; trust in the payment centred on the need to simplify the customer’s entire solution, trust in the stewardship of the organisation buying journey by ensuring that the right payment that operates the solution, and trust in the regulatory solution is available at the right place and time to service environment that the solution operates under. the customers’ transaction.

The vast majority of people are, and will continue to The next generation of solutions will enable consumers be, paid in a sovereign currency. Established payment to transact when they want, how they want, with whom networks (i.e. technologies and business relationships) they want and in the currency that is most convenient. also provide a significant barrier to newer players. As with Payments need to take effect immediately, allowing most disruption, the shift will start in the niches before consumers to exchange value with a merchant or a friend gradually working its way to the centre. While solutions and then continue with their day. The solutions need to are currently targeted at niches toward the bottom end be ubiquitous, with payment providers able to support of the market, they will quickly move up market as they consumers transacting in the context the consumer finds mature. Consumer trust in these alternative payment most convenient, whether it might be at the cash register, mechanisms continues to grow despite a number of very in the aisle, standing with friends infront of a restaurant public incidents that might test their confidence, such as after a meal, on the internet, or in a virtual social the recent insolvency of the REDGroup and subsequent environment. Providers must also support transactions in devaluation of all the outstanding gift cards issued by its the consumer’s full portfolio of currencies, and not just collection of retailers24. sovereign currencies.

Increased adoption of alternative platforms and currencies ... continued on page 17 will drive us to take a more nuanced view of payments and how we exchange value. Organisations need to adopt a design- and customer-centred approach; one founded on how the consumer’s ‘job they want done’ is changing as their behaviour evolves, putting aside the old technology and infrastructure-centric approaches to payments that we have used in the past.

15 The future of exchanging value The future of payments solutions As with the iPhone, these solutions are feature There has been a shift over the past decade to poor, but they provide a more compelling user using ‘good enough’ technologies, rather than experience. Rather than forcing customers the most sophisticated technologies available. to go to the payment mechanism, driving Previously, businesses built their strategies them to the till with its fixed-line PoS terminal around acquiring the best technologies available and ringing bell, payment providers need so that their products would be more capable to empower customers (and the merchants than the competition. Nokia is a case in point, serving them) to transact once the customer having built a global mobile telecommunications has acknowledged a need. Square, for example, business around the acquisition of better radio provides a simple alternative to the traditional technology from the Tampere University of PoS terminal by leveraging a merchants’ existing Technology. Today though, Apple dominates the network-connected smartphone or tablet, and is mobile phone market with a range of products building on this by providing a mobile wallet that the analysts and industry pundits initially for consumers that eliminates the need for a dismissed as underpowered and feature poor. conventional card-driven transaction. If payment Thanks to the availability to nearly ubiquitous providers don’t offer these solutions, then Internet connectivity and the mass adoption of someone else will. smart phones, the payments industry is about We are seeing a shift from technology acquisition to go through a similar shift, and incumbent to technology use. Rather than building a payment providers risk being left behind, payment strategy around the acquisition of a new with their payment infrastructure and solutions technology (such as NFC), a successful strategy circumvented, unless they adapt to a new set of needs to be based on streamlining the buying market dynamics. journey. While NFC might enable the consumer While the future is uncertain, we can expect to save a few seconds at the till, it does not that established payment platforms will address the far larger time they spent waiting in continue to play an important role in the short the queue beforehand. A more valuable solution to medium term. Consumers’ uncertainty about might avoid the need to queue entirely. This is emerging technologies and solutions will slow, a design-led approach, focused on the overall but not stall, their adoption, as they gradually problem the customer is solving and the context become comfortable with the risks involved. in which they are solving. Technologies are pulled Sovereign currencies’ continued importance into the payment strategy as needed, rather than to consumers’ salaries and investments will building the strategy around the acquisition of an also tie them to existing payment mechanisms. asset or capability. However, if payment providers fail to embrace The challenge today is to manage a portfolio the new technologies and currencies that are of technologies, from existing payment emerging, they will see their conventional infrastructure through NFC to emerging tools, payment solutions increasingly circumvented by combining them to enable customers to both merchants and customers as they move to transact when and how they need to. While more convenient and cost-effective solutions. face-to-face payments in sovereign currency will Payment providers need to acknowledge continue to be an important part of a payment that when, where and how people transact is strategy, the focus must be firmly on using a changing. The easy availability of ‘good enough’ portfolio of technology to support emerging technology is enabling a new generation purchasing trends. of solutions.

The future of exchanging value 16 In the background is the risk, for all stakeholders, Regulators also need to consider the transnational nature of new regulatory regimes driven by governments’ of the emerging (virtual) complementary currencies. need to provide a safe environment for consumers Where previously a complementary currency could be and merchants, and to assure tax revenue. As these outlawed (as many local currencies were in Germany new payment platforms become ubiquitous, the risk during the Great Depression), or regulation passed to increases of a failure affecting a significant proportion bring the complementary currency inline with sovereign of the consumer population, as does the possibility of currency (which happened to Bartercard), these new transactions moving offshore. complementary currencies are managed by foreign, transnational organisations. In the case of Bitcoin there How will governments’ react if one of these non-banking is no central authority. Transactions, and the tax revenue institutions fails? Some of these organisations might be associated with them, can move offshore, even when the the largest in their sector, such as Google with Google product or service is manufactured and provided locally. Wallet, but will they be considered financial institutions? The transnational nature of these currencies will make Governments will be concerned with solvency and the regulation challenging, while also making the currencies security of firms that offer non-traditional payment virtually impossible to eliminate. services. Central Banks which are responsible for the smooth running of the payments infrastructure, such as the Reserve Bank of Australia, will move to integrate * these new payments providers into existing payments Our relationship with merchants has moved away from frameworks. Accordingly, these firms may be required to the cash register and we now stand at the edge of a apply for banking licences as they are, in effect, taking dramatic shift in where, when and how we exchange deposits. Other non-banking institutions might also be value. Organisations that cannot work with regulators to brought under the regulatory umbrella to ensure that engender trust in their solution’s operation or follow the the complementary currencies they offer, the gift cards consumer-merchant relationship and provide payment and social media credits, remain solvent and to prevent solutions that are not instantaneous and ubiquitous, them from becoming platforms for money laundering risk being left behind. and fraud.

17 The future of exchanging value Regulation in a more complex environment The majority of these new complementary When, where and how people transact currencies and payment mechanisms required is changing. Customers and merchants, their providers to take deposits, and we can and individuals in peer-to-peer exchanges, expect regulators to attempt to bring them into are moving transactions online, away from the line once they represent a significant percentage till, and even into virtual environments and of deposits and transactions. currencies, dramatically increasing the complexity An additional complication is the transnational of our commercial environment. This increased nature of many of these new organisations. complexity brings with it increased risk, How can a regulator control a complementary and this increased risk will drive changes in the currency managed by a company domiciled regulatory environment, both to reduce the risk in another country, but which the regulator’s to consumers and merchants, and to maintain population can access via the Internet? How do tax revenues. we regulate a transaction where: the consumer Non-banking organisations – organisations that is located in one county; the merchant is in a provide some form of financial transactions but second; the company proving the means of which do not come under the regulatory umbrella exchanging value is in a third; and the actual – are increasingly taking deposits and providing platform used to exchange value is in the cloud payment mechanisms. Loyalty programs allow and potentially spread across multiple countries? consumers to store and exchange value through BitCoin could also provide a particularly loyalty or frequent flyer points, and the current challenging problem, with no central point of boom in gift cards and in-game and social control and exchanges spread across a range of network credits is an extension of this trend. countries and regulatory regimes. By placing their trust in the hands of non- Our globalised environment is continually financial institutions, consumers have made evolving, outgrowing our existing regulatory themselves subject to their terms and conditions. environment. From distributing a company’s A consumer’s holding can be devalued, as we operations around the world, we are now seeing saw with the collapse of Ansett and its frequent individual transactions being broken up and flyer program and again when REDgroup sprinkled around the globe. devalued all outstanding gift cards. Funds may also be withheld with recourse due to a perceived infraction of a payment provider’s terms and conditions.

Alternative means of exchanging value have always eventually come under regulatory control. From the local demurrage currencies that emerged in some areas of Europe during the Great Depression, through to the more recent emergence of customer loyalty schemes and BarterCard, regulators have always stepped in and banned currencies and instruments of exchange which the regulator has seen as overly risky, or which undermined tax revenues.

The future of exchanging value 18 References

1 Google Latitude (www.google.com/latitude) is a 12 Danielle Kucera (April 2012), Square Payment Pace location-aware mobile application that allows users Rises 25% In Niche Coveted By EBay, Bloomberg to share their current location with friends and (http://www.bloomberg.com/news/2012-04-25/ acquaintances. square-payment-pace-rises-25-in-niche-coveted-by- ebay.html) 2 foursquare (foursquare.com) is a location-based social network that uses location-aware smartphones 13 ABC Background briefing. PayPal Director of Product to allow subscribers to “check-in” to locations and and New Business AU, Andrew Rectman. businesses. 14 Anna Leach (September 2011), PayPal to move into 3 Square (squareup.com) provides a lightweight the shop – without cards or NFC, The Register. payment solution built around smartphones, tablets, 15 Eric Duprat, PayPal GM Mobile, keynote speech, and a small mag-stripe reader that plugs into an audio “Mobile payments today and tomorrow”, at ARM socket. TechCon 2010. 4 Facebook Credits (www.facebook.com/help/credits) 16 Farhad Manjoo (November 2011), The end of the are a virtual currency created by Facebook (facebook. credit card? A new app called Card Case foretells a com), a virtual social network, to enable members world without cash and plastic, Slate. to purchase goods and services on the Facebook platform. 17 Jung Ha-Won (August 2011), S. Korea chain opens ‘virtual’ store in subway station, AFP. 5 Bitcoin (bitcoin.org) is a virtual peer-to-peer currency developed to support low-cost payments without the 18 Hub Culture (www.hubculture.com) is an online social need for centralised payment processes. network intended to merge the online and offline business environments. 6 Speech at the Australian Institute of Company Directors lunch in Brisbane, 26 May, 2011. 19 (April 2011), Virtual currency used for commodity trade, Finextra. 7 Anhar Khanbhai (August 2011) Kogan reveals bumper growth, Connected Australia. 20 Paul Krugman (September 2011), Golden Cyberfetters, The New York Times. 8 Divakar Goswami (2011), Cell me the money, Deloitte. 21 Jessica Davies (July 2011), BBC Worldwide to use Facebook Credits for Doctor Who rentals, Marketing 9 Daniel D. Garcia-Swartz, Robert W. Hahn and Anne Week. Layne-Farrar (2006), The Move Toward a Cashless Society: A Closer Look at Payment Instrument 22 Openbucks (openbucks.com) is a gift card network Economics, Review of Network Economics (Volume that enables consumers to purchase goods and 5., Issue 2). services online without the need for a credit card. 10 Hong Kong transit authority. 23 Dispora* (October 2011), PayPal arbitrarily blocking donations to Diaspora*, Dispora* blog. 11 Claire Penicaud (May 2011), Safaricom – 56% Growth in M-Pesa revenue, Mobile Money for the 24 Madeleine Hefferman (March 2011), Gift cards Unbanked blog. set to grow despite REDGroup voucher woes, Smart Company.

19 The future of exchanging value About the authors

Peter Williams Ian Harper Peter Evans-Greenwood Peter Williams is an innovator and Ian Harper is one of Australia’s best Peter has spent 20 years working at thought leader in the digital world. known economists. He has worked the intersection between business and closely with governments, banks, technology. During his career he has Peter founded the eBusiness Consulting corporates and leading professional worked in Asia, Australia, Europe and group in Deloitte in 1996 and was CEO services firms at the highest level. the US, lived in Silicon Valley through of The Eclipse Group, one of Australia’s As a member of the celebrated Wallis boom and bust, and held leadership largest web development companies, Inquiry, he was at the forefront of roles in global organisations such as from 2003 to 2008. He was also the financial market reform in Australia. Deutsche Post DHL, as well as startups founder of Deloitte Digital, a business and research and development labs. pioneering the delivery of professional In August 2008, Ian left academic services online. life to become a Director of the These days he works as a consultant former Access Economics, following and strategic advisor on both business Peter is a sought after speaker and a 25-year career, including 16 years and technology sides of the fence. media commentator both locally and in various roles at the Melbourne An avid writer, blogger and public internationally and has worked with Business School. In recognition of his speaker, music lover and coffee addict, boards and senior executives of many service to the University of Melbourne, his biggest thrills are his family and that companies helping them understand Ian was elected Emeritus Professor on buzz one gets from helping clients to and adapt to the rapidly changing his departure. achieve the impossible. digital environment. More recently, he joined Deloitte Access Economics as a Partner when Deloitte acquired Access Economics in March 2011.

Ian Harper is sought after as a commentator and public speaker on economic and financial issues. He has been described as “one of those relatively rare academics who can communicate extremely well with both the business community and the academic community”.

The future of exchanging value 20 Peter Williams Robert Hillard Warren Green

Chief Edge Officer, National Leader, National Leader, Deloitte Centre for the Edge Technology Consulting Financial Services

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